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Last update: 28-04-2005
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Bankruptcy - France

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TABLE OF CONTENTS

1. What are the different types and aims of insolvency proceedings? 1.
2. What are the conditions for opening each type of insolvency proceedings? 2.
3. What is the role of the various participants in each type of proceedings? 3.
4. What are the effects of the opening of proceedings? 4.
5. What are the specific rules related to certain categories of claims? 5.
6. What are the rules relating to detrimental acts? 6.
7. What are the conditions for the lodgement and admission of claims? 7.
8. What are the rules relating to reorganisation proceedings? 8.
9. What are the rules relating to the winding up proceeding? 9.
10. What are the conditions for the closure of the proceeding? 10.

 

1. What are the different types and aims of insolvency proceedings?

If insolvency is defined as a situation in which debts are greater than assets, this concept is unknown in French law governing collective procedures. French law has the more restrictive concept of cessation of payments: the fact that it is impossible for the debtor to meet current liabilities with the available assets.

Pre-insolvency procedures for preventive reasons include:
  • alert procedure: when an auditor uncovers facts likely to compromise the continuity of the business, he informs the chairman of the board or the company’s manager. If he does not obtain a satisfactory answer, he asks for deliberations by the board of directors, and informs the president of the commercial court of this request. The works council is notified of the deliberations. If the problems persist, the auditor draws up a report which is presented at the next general meeting. If the continuity of the business is still not guaranteed by the general meeting’s decision, the auditor again reports this to the president of the commercial court;
  • ad hoc mandate: at the request of any interested party, the president of the commercial court appoints an ad hoc curator, determining his purpose and the duration of his mission.
Informal restructuring and reorganisation procedure:
  • amicable settlement: when an undertaking has a problem or needs that cannot be covered by financing matching its ability to pay but has not yet reached a stage of cessation of payments, it may ask for the initiation of an amicable settlement procedure. The president of the court then appoints a conciliator whose mission, which may not exceed three months, is to promote the functioning of the business and to seek an agreement with the creditors. Individual proceedings may be suspended by the president of the court during the conciliator’s mission. The debtor may not pay prior claims or engage in a legal transaction disposing of property without the authorisation of the president. If the president approves the agreement, individual proceedings are suspended during the enforcement of the agreement. If the agreement is not respected, a court to which, subsequently, a petition for the initiation of judicial settlement or winding-up proceedings is referred, can consider, contrary to the opinion of the president, that at the date on which the amicable settlement was initiated, the undertaking was in fact in a state of cessation of payments.
The formal insolvency proceedings for administration or liquidation purposes are:
  • Judicial settlement is aimed at rescuing the undertaking, maintaining the business and jobs and clearing liabilities. The proceedings consist of the adoption by the court of a judicial settlement plan either involving the continuation of the undertaking (creditors are obliged to accept certain deadlines) or the transfer of the business (the undertaking and its main contracts are sold to a third party who accepts certain commitments).
  • Winding-up is declared when judicial settlement is clearly impossible. The company’s business is halted or sold to a third party in line with more flexible arrangements than in the judicial settlement procedure.

2. What are the conditions for opening each type of insolvency proceedings?

There are two different systems under French law for dealing with insolvency situations:

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  1. With regard to traders, farmers and small businesses, and all legal persons (with the exception of associations of co-owners of a building) : the proceedings are the court-ordered judicial settlement and winding-up procedures mentioned above and described below. Natural persons engaged in an independent profession are not eligible for these proceedings. The proceedings are initiated when the debtor is in a situation of cessation of payments, defined as a situation in which it is impossible for him to meet current liabilities with available assets.
  2. With regard to natural persons with non-professional debts (which include debts arising from a company guarantee, provided that the guarantee is not a director’s guarantee) : the conditions for opening the proceedings are good faith and the manifest impossibility of paying all the debts. The procedure is then as follows:

The person refers the matter to an administrative board, which draws up a statement of debts, after having obtained representations from the creditors, and which can ask a court to suspend prosecutions. The board reconciles the parties and proposes a plan comprising measures that postpone, re-schedule or grant remission of the debt. If the conciliation attempt fails, the board recommends some of these measures for a period of ten years or more in the case of the repayment of loans contracted for the purchase of the main residence. If the board finds that there is a lack of resources or assets that can be seized to clear part of the debts, it recommends that demands for the payment of the debts be suspended. The judge decides in any appeals against these recommendations.

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If, in addition to good faith, the person can prove that his situation is irremediably compromised, in other words that it is impossible for him to implement the measures mentioned above, he may apply to the court for the opening of personal recovery proceedings: the creditors are listed and the assets are evaluated. The judge orders the winding-up of the debtor’s personal wealth. He appoints a liquidator to distribute the income from the assets among the creditors according to ranking. If it is not possible to meet the debts of all the creditors, he declares the proceedings closed due to insufficient assets, which results in the erasing of the debtor’s non-professional debts, with the exception of those paid by means of a guarantee.

In the case of commercial proceedings, the debtor, a creditor or the prosecution service may refer the matter to a court. The court can also take the case up of its own motion.

The judgment which opens the proceedings is announced in the trade register and companies’ register and, if appropriate, in the directory of professions in which the craftsmen are registered. It is also published in two official gazettes.

3. What is the role of the various participants in each type of proceedings?

The competent court for professionals and companies is the commercial court, consisting of elected traders. In some French départements, exceptionally, there is no commercial court, in which case it is the Regional Court, consisting of three professional judges, which hears the case. In Alsace-Moselle, the commercial section of the Regional Court consists of a professional judge who presides over the proceedings and of two elected, non-professional judges (system of non-professional judges). The Regional Court is competent for cases involving farmers. In the case of non-professional debtors, the competent judge is the enforcement judge, a professional judge who sits alone.

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The court examines the case to see whether the undertaking can be turned around. If it can, it approves a judicial settlement plan which can be either a continuation plan (in this case, payment schedules are imposed on the creditors and the company’s business is continued, in the hands of the same debtor) , or a sale plan (in this case the company is sold to a third party, and the proceeds of the sale are used to pay off the creditors). If the company cannot be turned around, the company’s assets are sold as a block or separately.

A bankruptcy judge, appointed within the court opening the proceedings, is asked to oversee the rapid conducting of the proceedings and the protection of the interests at stake. He rules in particular on:

- challenges that arise from petitions to establish ownership of assets, where third parties claim to be the owners of assets held by the debtor

- complaints lodged concerning acts by administrators or curators appointed by the court

- challenges by creditors

- petitions by the debtor or administrator to obtain authorisation to carry out certain acts during the proceedings

- the conditions for the sale of assets in the case of winding-up.

His decisions may be appealed against before the court.

In the case of judicial settlement:

1) The administrator appointed by the court (this appointment is optional except for companies employing over 50 employees and with turnover of over €3 100 000) , is chosen from a list of authorised professionals. He draws up a report on the possibilities of turning the company around and, depending on the situation, manages the company or assists a manager who has not been prohibited from managing the company, during a period starting from the opening of the proceedings and ending with the decision regarding judicial settlement or winding-up. If the judge orders the sale of the company, he implements this.

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2) The creditors’ representative, appointed by the court from another list of professionals, informs the creditors of the opening of the proceedings, receives their declarations of claims, and asks the bankruptcy judge to accept or reject these claims. He alone is empowered to perform acts in the collective interests of the creditors.

3) The auditor responsible for implementing the plan: when a judicial settlement plan is approved, he is tasked with ensuring that it is properly implemented, paying creditors and referring the matter to the court in the event of non-compliance with a view to having the plan terminated.

In the event of winding-up ordered by the court: the liquidator, appointed from another list of authorised professionals, performs the acts required to realise the assets and pays the creditors.

In the case of personal recovery proceedings requested by a private individual: the liquidator lists the creditors, draws up a statement of the debtor’s situation, sells the debtor’s assets and pays off the creditors.

Duties of the debtor:

In the case of judicial settlement ordered by the court, the court may appoint an administrator. It defines his mission, which may be to assist the debtor or to manage the company alone. The debtor continues to exercise the rights and actions in relation to his assets that are not included in the administrator’s mission. Everyday management actions which he carries out alone are deemed to be valid with respect to third parties of good faith. However, he must not pay any prior debts (except if they can be offset against related obligations).

If the court does not appoint an administrator, the debtor manages his company alone and draws up a draft judicial settlement plan.

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In the case of winding-up ordered by the court, the debtor is prohibited from managing and disposing of any assets until the proceedings are closed. The liquidator performs his duties instead. The debtor can only perform private duties, including non-pecuniary duties.

In the case of personal recovery proceedings, the debtor is prohibited from administering and disposing of any assets until the proceedings are closed. The liquidator performs his duties instead.

Rights of creditors and appeals:

Creditors must lodge their claims with the creditors’ representative. Individual proceedings initiated before the opening of the proceedings are halted as of right.

All creditors may appeal a decision rejecting their claims. Only the creditor-plaintiff may appeal a judgment opening or refusing to open proceedings.

4. What are the effects of the opening of proceedings?

  • Opening proceedings results in the suspension of individual prosecutions based on claims that arose prior to this, a prohibition on paying these claims, and the continuation of contracts in progress provided that the forthcoming payment deadlines are respected. Redundancies must be authorised by the bankruptcy judge.
  • Once the proceedings are opened, an inventory is drawn up of the debtor’s assets. The owners of assets which the company had mere possession can reclaim them immediately.
  • In the case of judicial settlement of a company, the debtor continues to perform acts of disposal and management with respect to his assets. In the case of winding-up, the liquidator performs the debtor’s duties, with the exception of those that are purely personal.
  • All claims must be lodged, with the sole exception of debts arising from an employment contract.
  • There are no specific interim measures other than those mentioned in the first paragraph above. Precautionary measures, in other words preventive seizure and restrictive measures (mortgages, charges on a business, pledges of company shares, pledges of securities, etc.) , mean that the assets seized cannot be disposed of. They must be declared null and void if they have been introduced by the debtor since the date of cessation of payments.
  • Notification by the Treasury of third parties into whose hands assets have passed plus attachments of sums of money in the hands of third persons are not affected by the opening of insolvency proceedings.
  • The rules are the same for proceedings opened with respect to natural persons for non-professional debts.
  • Rules regarding publicity in France of a decision to open insolvency proceedings issued in another Member State of the European Union on the basis of Article 3. 1 of the Regulation of 22 May 2000 have not yet been laid down in a text, but publicity is compulsory by virtue of the direct effect of this Regulation. A draft decree provides that publicity be arranged by the clerk of the trade and companies’ register.

5. What are the specific rules related to certain categories of claims?

  • Specific rules relating to third parties’ rights in rem: all creditors holding a right in rem (in other words a mortgage or pledge conferring a preferential right over the sales price of the object and/or of a right to follow the property) must lodge their claim; proceedings are suspended.
  • Rules relating to set-off: these rules apply when two persons are found to have debts with respect to each other. Their reciprocal debts are set off against each other until the smallest of them alone is outstanding. The creditor may offset himself as of right, without authorisation, but only for the claims involved.
  • Clause on reservation of title: this clause concluded between the vendor and the purchaser has the effect of suspending the transfer of title until the full payment of the price. It is enforceable in the collective proceedings.
  • Contracts of employment: cf. paragraph 7 above: employees do not have to lodge their claims.
  • There is a guarantee institution (National Salary Guarantee Fund - Fonds national de garantie des salaires) which advances amounts owed by way of salaries, within very short deadlines that vary depending on the nature of the amount of salary owed and the date the debt arose (prior or subsequent to the opening of the proceedings). Salaries owed before the opening of proceedings are guaranteed by the National Salary Guarantee Fund, while those not paid during the period between the opening of the proceedings and the adoption of a judicial settlement plan are not guaranteed. In the case of winding-up, salaries are in principle guaranteed only up to the amount of the sums owed during the two weeks following winding-up. Redundancy payments are not guaranteed unless the employment contract was prematurely terminated within two weeks of the winding-up or within one month of the judgment approving the judicial settlement plan.

6. What are the rules relating to detrimental acts?

The observation period starts on the date of cessation of payments and ends on the date when proceedings are opened. The court cannot fix a longer period than eighteen months.

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All acts performed for payment during this period may be declared void if the contracting party was aware of the cessation of payments. The court has the power to decide on annulment.

Some acts, exhaustively listed by the law, must be declared void if they were performed during the observation period, whether or not the contracting party was aware of the cessation of payments. They include contracts in which the debtor’s duties considerably exceed those of the other party, a payment made by a means not ordinarily accepted, a mortgage for a prior debt and any other act that is free of charge.

7. What are the conditions for the lodgement and admission of claims?

1) Verification of claims:

The creditors’ representative informs known creditors that they must declare their claims to him. The debtor must provide him with a list of creditors.

All creditors, with the sole exception of employees, must lodge their claims within two months from the publication of the judgment opening the proceedings. Once this deadline has expired, they must ask for an extension of time for lodging their claims if they can show that they were not responsible for the failure to lodge their claims.

Claims not declared which have not been granted an extension of time are extinguished.

The creditors’ representative proceeds with an initial verification of the claims, and proposes to the bankruptcy judge that he admit or reject them. When he is considering a proposal that the claims be rejected, he must inform the creditor of this. If the creditor wishes to dispute this proposal by the creditors’ representative, he must reply within thirty days.

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The ruling by the bankruptcy judge may be appealed against by any one of the interested parties.

Salary claims are checked and proven by the creditors’ representative on the basis of the evidence he gathers. He informs the employees that the statement of salary claims has been lodged. Those concerned may challenge this statement before the industrial tribunal within two months.

2) Ranking of claims

A claim is secured, in other words the holder benefits from priority as regards payment, which may concern all or some (movable property, for instance, or property that has been pledged) of the debtor’s assets.

However, if the claim is unsecured: the holder will not be paid until after the secured creditors. A secured claim may or may not be published (for instance the super-preferential claim of employees). The principle of collective proceedings is based on the equality of unsecured creditors: when collective proceedings are opened, such creditors are placed on an equal footing and may no longer act individually, in competition with each other. Secured creditors are, however, traditionally protected in collective proceedings.

Claims that arise after the judgment opening the proceedings are in principle paid before claims that arose beforehand, even secured claims.

There are several exceptions to this:

- Regardless of the outcome of the proceedings, legal costs and salaries from the sixty days prior to the opening of the proceedings enjoy preference over claims that arose after the proceedings were opened.

- If the proceedings end in winding-up, claims guaranteed by security are also paid preferentially to claims that arose after the proceedings were opened.

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8. What are the rules relating to reorganisation proceedings?

Restructuring of the company may take the form of continuation of the company or sale of the company.

- Continuation

The plan provides for uniform payment schedules which may be longer than ten years. The plan is issued by the court at the proposal of the administrator. Creditors are simply consulted and may not challenge the plan. Creditors cannot be obliged to accept remission of debts.

- Sale:

All persons who are not directors of the company or relatives of a director may submit a purchase offer.

The offer may concern all of the company or some of its branches of activity. Third parties may not have access to it.

The court accepts the offer which will guarantee jobs for the largest period and ensure payment of creditors.

Once the court approves the sales plan, it mentions the commitments undertaken by the purchaser which concern the future of the business, the arrangements for maintaining the company and the clearing of liabilities.

The plan indicates the number of employees for whom redundancy is authorised, in addition to the activities and professional categories involved.

The contracts necessary for maintaining the business are transferred to the purchaser.

The latter is required to pay the sales price. In principle, he does not take on the liabilities except for the payments owed that correspond to the financing of a property subject to a secured debt included in the plan.

The court may subsequently decide on a substantial modification of the means and objectives of the plan.

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9. What are the rules relating to the winding up proceeding?

When assets form a production unit (which has been defined by the courts as a group of material and human resources permitting the continuation or emergence of an economic activity) , they may be the subject of a global sale. The liquidator calls for offers which may be inspected by all interested parties. The bankruptcy judge chooses the offer that appears to be the most serious and that offers the best conditions for sustaining jobs on a lasting basis and paying creditors.

Isolated assets which do not form a production unit are sold as decided by the bankruptcy judge, who may authorise sale by private treaty or by auction.

The liquidator distributes the proceeds of sales of assets. He must combine the securities, notably immovable property securities, which some creditors own, with the general securities attached to legal costs and the National Salary Guarantee Fund (an institution which advances to employees the amount of salary claims and which is entitled to have its payments refunded). Non-secured creditors are not paid until after full payment of creditors benefiting from securities and priorities.

10. What are the conditions for the closure of the proceeding?

Closure is pronounced when there is no further current liability or when the continuation of the winding-up operations is impossible because the assets are insufficient. The matter can be referred to the court at any time or the court may take it up of its own accord. The liquidator submits his accounts, which show the details of the realisation of assets and of the distribution of the proceeds. The debtor may challenge this.

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In principle, a debtor who is a natural person is given full capacity and can start a new business following the judgment closing the winding-up. However, it is a different matter if the court decides to impose on him a prohibition to manage or a personal bankruptcy measure (lasting five years at least, with no maximum) because he has committed management errors or has performed acts, listed in law, which are damaging to creditors (for instance, having continued with a business in deficit, misappropriated the assets, used ruinous means to obtain funds, paid a creditor after cessation of payments or failed to keep accounts).

In principle, creditors can no longer pursue the debtor after the closure of the winding-up. This is not the case, however, if the court has prohibited the debtor from managing or has applied a bankruptcy measure to him, or if a creditor proves fraud in relation to him (for instance the fact that the debtor did not inform the liquidator of the existence of a claim) or avails of a criminal judgment for facts alien to the professional activity.

The creditors can always sue in relation to the debtor’s guarantees.

COMMENT:

The law on collective proceedings may be amended as the government has referred an important bill to the Conseil d’Etat (highest administrative court and government advisory body) , the main lines of which are as follows:

- A debtor who can provide evidence of recognised or foreseeable difficulties, or who is in a situation of cessation of payments, can ask the court to appoint a conciliator to negotiate all measures with the main creditors that are likely to ensure the continuity of the company. Approval of this agreement by the court will prevent it from being challenged if, subsequently, judicial settlement or winding-up proceedings are opened.

- A debtor who can provide evidence of difficulties likely to lead to a cessation of payments may ask the court to open contingency proceedings, which would lead to the suspension of individual prosecutions and the adoption of a continuation plan. The continuation plan likely to be approved by the court in the context of contingency or judicial settlement proceedings could comprise remission of debts, which some credit institutions or suppliers would be forced to accept if most of the credit institutions and suppliers accept them and the court admits them.

- Judicial settlement of a company ordered by a court may no longer result in the sale of the company. This outcome is reserved for winding-up ordered by a court.

- Natural persons engaged in an individual independent professional activity may benefit from insolvency proceedings

- It is clear that this concise description of this bill does not prejudice any subsequent amendments of the bill before parliament.



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Last update: 28-04-2005

 
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